Rerouting the flow of ‘dark money’ into political campaigns

Heather K. Gerken is a professor of law at Yale Law School, where Webb Lyons is a student. Wade Gibson is director of the Fiscal Policy Center at Connecticut Voices for Children.

Campaign finance reform is getting harder and harder, thanks to decisions like the one the Supreme Court handed down Wednesday in McCutcheon v. FEC. Just ask the IRS. In a good-faith effort to help our flawed campaign-finance system, the Internal Revenue Service ventured into the elections arena and received a thumping so severe you would think Frank Underwood of “House of Cards” had arranged it.

The IRS knew what we all know: “Dark money” — the money spent on elections by anonymous donors — is a problem. And the IRS has jurisdiction over one of the main sources of dark money: 501(c)(4) organizations, such as Karl Rove’s Crossroads GPS. These “social welfare” organizations spent more than $250 million in 2012 — roughly a quarter of all campaign spending by outside groups. But unlike political parties, PACs or super PACs, they weren’t required to disclose a single donor.

Social welfare organizations are entitled to tax-exempt status only if they are “primarily” involved in non-campaign activity. Because that vague standard leaves a lot of room for abuse, the IRS proposed rules to clarify the role that 501(c)(4)s can play in campaigns. In just three months, the agency received more than 140,000 comments — more than for any other regulation — and they were overwhelmingly negative. Both conservative and liberal groups insisted that the proposals would stifle legitimate social welfare activities and run afoul of the First Amendment.

We hate to pile on, but we have a different quarrel with the IRS’s proposal: It doesn’t address the core problem with social welfare organizations, their lack of transparency. The IRS rules wouldn’t have mandated disclosure of 501(c)(4) donors; they would simply put limits on what counts as campaign activity.

A cynic might think that’s just as well because dark money will find its way into the system no matter what. As election scholars often note, campaign money is like water; it always finds an outlet. Whenever regulations make it hard for wealthy donors to fund politics, donors find another way. Congress closed the “soft money” loophole for political parties, and money flowed into issue ads and so-called 527 groups. Now, 527s have been displaced by super political action committees and 501(c)(4)s.

Unless and until Congress and the Supreme Court fundamentally change the regulatory environment, proposals like the IRS’s won’t stop the flow of money; they’ll just reroute it. The story of 2016 and 2020 will be the same as in 2012, except with a different set of organizations serving donors’ needs. Given the hydraulics of campaign finance reform, we should focus not on stemming the flow of money but rather on directing it toward greater transparency.

Here is one simple proposal for doing so: Congress should require that any advertisement funded directly or indirectly by a group that does not disclose its donors acknowledge that fact. This “nondisclosure disclosure” would be simple and truthful: “This ad was paid for by ‘X,’ which does not disclose the identity of its donors.” That could help voters figure out how much trust to put in the ad.

This proposal has many virtues. It’s constitutional, for one. Even the Supreme Court’s much-reviled Citizens United decision upheld disclosure and disclaimer provisions by an 8-to-1 vote, and the court vigorously reaffirmed that holding in McCutcheon. Given how much of the campaign-finance system the court has eviscerated in recent years, disclosures are becoming the only game in town.

The fix is also universal. It doesn’t repeat the mistake we’ve continually made in campaign finance: engaging in the regulatory equivalent of whack-a-mole by targeting the troublemakers du jour while leaving space for new organizations to emerge during the next campaign cycle. Our proposal targets ads, not organizations. So, unlike the IRS’s proposal, it applies to any organization that fails to disclose its donors: social welfare groups, labor unions, chambers of commerce and private individuals. Better yet, it would apply to future organizations built to funnel dark money.

Finally, rather than attempting to sail into political headwinds, our proposal works with, not against, political incentives. It harnesses politics to fix politics. We are under no illusion that donors would stop seeking anonymous outlets for funding. But our proposal should reduce the value of those anonymous outlets by giving voters a reason to be skeptical of their ads. Donors would be forced to choose. They can fund organizations that disclose their donors, like the political parties or super PACs. Or they can fund groups that keep donors’ identities hidden, knowing that their ads may not persuade cynical voters. Political incentives will push money into transparent organizations rather than away from them. Money and political influence would be easier to trace.

That’s not a full remedy for our ailing system, but it’s the type of modest reform that makes bigger and better reform possible.